Both candidates’ tax plans would require some sacrifice

President Barack Obama and his rival Mitt Romney spent a good part of their first debate arguing about the effects of their tax plans on the nation’s gaping deficits. It made for good political theater, but neither man was completely honest about the sacrifices that will be asked of the American public.

During Wednesday night’s debate, Obama and the former Massachusetts governor traded barbs over Romney’s promise to lower tax rates for ordinary Americans, a promise Obama alleged would add $5 trillion to the deficit. Romney denied that, and he promised he’d revamp the tax code without raising taxes and without adding to deficits.

Romney insisted the revenue lost from his proposal to cut existing tax rates by 20 percent would be made up by closing loopholes in the tax code, which aren’t really loopholes but rather deductions Americans have been accustomed to receiving during the calculation of what they owe in income taxes. Tax experts, however, don’t see how this happens without very steep cuts to popular deductions, such as those for charitable giving and mortgage interest, that many in Congress have concluded would be political suicide to change. Neither Romney nor Obama spelled out what sort of tax breaks they’re prepared to tackle.

“Nobody wants to give the American public the bad news that there is only one way to deal with our budget deficit, and that’s we’re going to have to raise taxes and cut spending,” said Roberton Williams, a senior fellow at the Tax Policy Center, a joint effort of the centrist Urban Institute and the center-left Brookings Institution.

Many analysts think it virtually impossible to have comprehensive tax reform without a parallel effort to reduce debt and deficits as part of a long-term political deal. Romney envisions tax reform and deficit reduction independent of each other.

“We did it in 1986, but in this environment I can’t see how. I think that dynamic has been pretty well established,” said Steve Bell, who was chief of staff on the Republican-led Senate Budget Committee during the last comprehensive tax reform and is now senior director of economic policy at the Bipartisan Policy Center, a think tank that tries to narrow political differences on legislation.

The president’s own National Commission on Fiscal Responsibility and Reform, whose recommendations for deficit reduction he largely ignored, called in December 2010 for closing tax loopholes as part of a revamp of the tax code, and using those revenues to narrow the deficit.

Romney has embraced the commission’s call for lower tax rates with fewer deductions, but he hasn’t spelled out what he’d end or scale back.

“He’s got half a plan – he’s got the goodies part of it, the fun part, the tax cuts. But he doesn’t have the broccoli part,” said Williams. “He offers the dessert, but doesn’t tell you that you have to eat your broccoli, too.”

Obama hinted at broccoli Wednesday night, suggesting some tax hikes were needed but not offering a lot of detail on how those would fit within a comprehensive reworking of the tax code and deficit reduction.

The president wants a higher income tax bracket of 39.6 percent for individuals with adjusted gross income above $200,000 and families above $250,000. He’d leave in place the Bush-era tax cuts for Americans earning less than that. Budget critics call that irresponsible, since it leaves in place the biggest hit to revenues – a loss of about $2 trillion over 10 years.

Romney would take the new revenues coming from closed loopholes and deductions and use them to partially offset the revenue lost from lowering income tax brackets. He promised to be revenue neutral, and a campaign aide explained that there isn’t a one-to-one match since some of the lost revenue would be replaced by revenues coming from economic growth sparked by lower tax rates.

The degree to which economic growth offsets lost revenue remains a fiercely debated topic among tax and budget analysts.

“Part of our plan is to create more growth, and historically, if you look at the relationship between tax revenues and economic growth, they are correlated,” said the Romney official, who demanded anonymity in order to freely discuss the tax plan.

In order for Romney’s plan to work, he’ll have to scale back itemized tax deductions, and these range from deductions of mortgage interest to state and local taxes to charitable giving. And wealthier Americans are keener to claim those deductions.

Although he refused to specify Wednesday night what tax breaks he’d end, the Romney camp this week floated the idea of capping itemized deductions at $17,000. The Romney aide familiar with his thinking on tax policy cautioned that $17,000 was not a hard number, just an example.

“We’re not saying that’s the way we would go. The point wasn’t the particular numbers, but the idea of capping a particular dollar amount is one way you could go about achieving the governor’s tax-reform principles,” said the aide.

Based on IRS tax data from 2009, the Tax Policy Center estimates that the bottom 20 percent of American taxpayers averaged $12,217 in itemized deductions, the top 20 percent three times that, at $37,673.

If the $17,000 figure stuck, it’d mean the top 20 percent of wage earners would see their income subject to a taxation rise on average by $20,673, according to the IRS data. The tax rate on that taxable income, however, would fall by 20 percent under the Romney plan.